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Shall One Invest in Cancelled Targets after the Termination of

Mergers and Acquisitions?

Department of Finance, Insurance, and Real Estate, Washington State University, U.S.A.

The Peter J. Tobin College of Business, St. John's University, U.S.A.

College of Business Administration, University of Rhode Island, U.S.A.

Many portfolio managers on Wall Street believe that investing in cancelled targets after the termination of mergers and acquisitions is a profitable strategy because arbitrageurs usually unwind their position after the cancellation announcement. While the anecdotal evidence shows that arbitrageurs do hold large positions in target companies when the deals are cancelled, we do not find that investing in cancelled targets is a profitable strategy. Our results also suggest that, in general, there is no relation between trading volume and abnormal returns. The overall evidence indicates that the target stocks are efficiently priced, and arbitrageurs unwinding their positions does not provide an opportunity for abnormal returns.

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